Electronic trading systems offer contracts for trade. Traders place orders for the contracts. Orders that are entered into the electronic trading system by traders are real orders. Real orders may be entered for any tradable contract including, but not limited to, futures, options, inter-commodity spreads, intra-commodity spreads, futures strips, calendar spreads, butterfly spreads, condor spreads, crack spreads, straddles, and strangles. Traders enter the appropriate information, for example, tradable item, bid price, or month, into the electronic trading systems when placing an order.
Implied orders, unlike real orders, are generated by electronic trading systems on behalf of traders who have entered real orders. In other words, implied orders are computer generated orders derived from real orders. For example, an implied spread may be derived from two real orders. The system creates the “derived” or “implied” order and provides the implied order as a market that may be traded against. If a trader trades against this implied order, then the real orders that combined to create the implied order and the resulting market are executed as matched trades.
Implied orders generally increase overall market liquidity. The creation of implied orders increases the number of tradable items, which has the potential of attracting additional traders. Additionally, implied orders may have better prices than the corresponding real orders in the same contract. This can occur when two or more traders incrementally improve their order prices in hope of attracting a trade. Combining the small improvements from two or more real orders can result in a big improvement in the implied order. In general, advertising implied orders at better prices will encourage traders to enter the opposing orders to trade with them. Exchanges benefit from increased transaction volume. Transaction volume will increase as the number of matched trade items increases.
Electronic trading systems conventionally only offered full size contracts for trade. However, in order to increase liquidity, small contracts have now been offered. A “small contract” is a contract that has a size, volume, quantity, or other specification that is smaller than the full size contract. Traders of small contracts are limited to trading with other traders of small contracts. It is not possible for small contracts to be exchanged with full size contracts nor for small contracts to participate in trades with combination contracts defined in terms of the full size contract. As a result, the smaller market participants do not benefit fully from the liquidity in the full size contracts.